Fiscal Cliff, Sequestration Major Concern for Military

Military families' worries about fiscal cliff talks are immediate and hard-hitting: cuts in retirement benefits and increases in health care costs will kick in should sequestration occur.

By Danielle Andrus|December 19, 2012 at 07:13 AM

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Military families have unique needs and concerns, but they’re worried about the fiscal cliff just like everybody else. The First Command Financial Behaviors Index found two-thirds of middle class military families are worried the automatic tax increases and spending cuts scheduled for Jan. 1, will not be stopped, the company announced Dec. 12. Another two-thirds of military families are afraid the country will return to recession if the fiscal cliff is not averted.

Military families are especially concerned about sequestration, which divides spending cuts evenly between defense and nondefense programs. Half of respondents said they expected their retirement benefits to fall as a result, or that they will have to take on more of their health care expenses. Forty percent were worried about cuts to personal expense benefits like those for housing, clothing and food. Almost a third said they were worried about cuts to educational benefits, and 31% were afraid their discretionary income would suffer.

“If you make a cut to the military budget, it has a corresponding effect on the lives of our men and women in uniform and their families,” Scott Spiker, CEO of First Command Financial Services, told AdvisorOne Wednesday in an email. “Sequestration is much bigger than the automatic year-end cuts in federal spending that have been the focus of lawmakers and the news media.”

Indeed, respondents indicated serious long-term concerns that may arise as a result of sequestration. Over a quarter of respondents said they were worried about the effects on their career, thinking they may be less likely to be promoted and more likely to leave the service early. Nearly 90% said they were hoping to serve for at least 20 years in order to qualify for traditional military retirement.

“Military families think of sequestration as the significant spending reductions that are already well under way,” Spiker (left) continued. “They recognize that the coming reduction in force will be huge, affecting one-sixth of the military and impacting retirement pay. They see the base realignments and closures that are already in play. They know that promotion rates are being reduced, meaning that fewer by far will be promoted to the next level. They understand that many servicemembers will be facing an up-or-out situation. And of course they see the changes being made to military retirement benefits, such as TRICARE. The result is a diminished confidence within the career military.”

With that diminished confidence, military members are preparing for cuts. Almost half of respondents are responding by cutting back on everyday spending, but their belt-tightening could affect their long-term security as well. Twenty-eight percent are saving less, and 20% are moving to more conservative investments. Just 9% are becoming so conservative that they’re moving their investments to cash.

There is an opportunity for advisors to help military members who are concerned about the effects of sequestration on their financial security. Just 5% have started working with a financial planner as a result of their concerns.

“At all times, advisors must remember that sequestration is a uniquely personal issue for career servicemembers and their families,” Spiker said. “Two thirds of survey respondents have expressed concern about the possibility of involuntary separation from the military. […] They are looking at a loss of career in the short term and a change in retirement benefits for the long term. Both issues must be addressed in the financial advisory process. If advisors want to bring real value to the lives of members of the military, then they should focus less on wealth management and investment returns and more on issues of financial security.”

The index is based on the responses of 200 active-duty servicemembers or family members. First Command also surveyed members of the general population and found similar attitudes in both groups. Sixty-four percent of military respondents said they were not confident Washington could avert the fiscal cliff, compared with 58% of the general population, and about 70% of both groups think that failure will lead to higher taxes and slower job growth.

“Notably, military households are significantly more likely than general population households to be taking some type of action to prepare for sequestration and the fiscal cliff,” Spiker said.

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